Exchange rate regime choice for Turkey

The exchange rate regimes can influence the economic stability and economic growth in the short term and the midterm. Therefore it is crucial to determine the most appropriate exchange rate regime for the macroeconomic targets of countries. According to dictum devoted to exchange rate regime choice, in determining the most appropriate exchange rate regimes for the countries, the characteristics of each economy should be taken into consideration. Among the factors affecting the choice of exchange rate regimes, factors such as; degree of openness of the economy, the degree of development of financial markets, the extend of dollarization, the vulnerability to shocks, inflation sensitivity of the citizens of the country and the extent of exchange rate pass through become prominent.Turkey has faced high inflation rates and implemented disinflation programs for many years. Thus in Turkey, the inflation sensitivity and struggling against inflation, become prominent for the implemented economic policies and the choice of exchange rate regimes. Therefore calculation of the exchange rate pass through, that expresses the reflectivity of the exchange rate changes to import prices and domestic prices, is seen as an important criterion to determine the optimal exchange rate regime. Because in countries with a high pass through coefficient, the stabilization programs based on exchange rates will give succsefull results. On the other hand, floating exchange rate regimes will be appropriate in countries with a low pass through coefficient.The purpose of this study is to examine the most appropriate Exchange rate regime for Tukey, in the framework of exchange rate pass through. Therefore, in this study the exchange rate pass through effect is analyzed through a vector error correction model from January 2003 to December 2009.